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Five ISA myths exposed

06 April 2020

4 minute read

Many people don’t make the most of their annual ISA allowance because they aren’t sure exactly how ISAs work, or because they don’t think the benefits are really worth it. Here, we dispel five of the most common ISA myths that might be preventing you from making the most of this year’s £20,000 allowance before the end of the tax year on 5 April.

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

Why changes to the dividend allowance might make ISAs more important.

How ISAs are more flexible.

How you can hold cash in your Investment ISA until you decide where to invest.

This tax year (2020-21), you can put up to £20,000 into ISAs and any returns you make on money within an ISA is tax-free, making them an attractive option for some savers and investors. But, if you don’t use this year’s allowance by the end of the tax year on 5 April 2021, you’ll lose it.

In case you’re not sure whether an ISA could benefit you, we’ve debunked some of the main ISA myths which often cause confusion.

Bear in mind ISA rules may change in future, and that the value of any favourable tax treatment to you will depend on your individual circumstances. And remember, the value of investments can fall as well as rise.

Myth one – You can only have one ISA each tax year

There are different types of ISAs: cash, investment (also called stocks & shares ISAs), Lifetime and Innovative Finance (which enable you to invest in peer-to-peer lending).

You can split your annual allowance between more than one type of ISA, so you could put some in a cash ISA and some in an investment ISA, for example. However, you can’t pay money into more than one of the same type of ISA in the same tax year. For example, if you’ve already put some of this year’s allowance into an investment ISA, you couldn’t open another investment ISA with a different provider and pay into that as well – any additional money would have to go into the ISA you’ve already paid into.

Once the new tax year starts on 6 April, you would be allowed to open another investment ISA with a different provider, should you wish.

Investment ISA

An easy way to start investing

Also known as a stocks and shares ISA, an Investment ISA is a tax-efficient1, simple way to invest for your future. Invest up to £20,000 per year and the returns you make from your investments are tax-free.

One of the main attractions of ISAs is that any money you make is tax-free. However, there are other tax allowances which mean you won’t necessarily pay tax on savings and investments that are held outside of an ISA, leading some to believe ISAs aren’t worth bothering with.

For example, you can receive up to £2,000 a year in dividend income without paying tax. This might be adequate for many people, but if you build up an investment portfolio over many years, you may find that the amount you receive in dividends exceeds the annual allowance. If that happens, basic-rate taxpayers must pay 7.5% on any dividends above the £2,000 allowance. Higher-rate taxpayers pay 32.5% and additional-rate taxpayers pay 38.1%. ISAs help protect against this risk.

Similarly, gains on investments are liable to capital gains tax (CGT). The standard CGT rate is 10%, while the higher rate is 20%. You have a CGT allowance every tax year – it’s currently £12,300 which means if you sell any investments, you’ll only pay tax on profits above that amount. If your gains are less than that, or you plan carefully and stagger the sale of your investments over a number of years, you can avoid CGT. But if you invest within an ISA, you don’t have to worry about the amount of profit you’ve made when you want to sell as CGT won’t be applicable.

Another allowance, the Personal Savings Allowance (PSA), enables you to earn interest on your savings income without paying tax. Basic rate taxpayers can earn up to £1,000 in interest each year tax-free, and higher rate taxpayers up to £500. Additional rate taxpayers don’t have a PSA. You’ll pay income tax on any interest above these amounts, unless your savings are in a cash ISA in which case all interest will be tax-free. This savings income covers several different kinds of investment income.

Myth three – You can’t take money out and pay it back in

If you hold money in an ISA, you can take this out of your account and put it back in within the same tax year without this affecting your annual allowance.

For example, if you’ve used £10,000 of your ISA allowance this tax year, and take out £2,000, you could put it back in before the tax year ends on 5 April, and still be able to pay in a further £10,000 – the remainder of your £20,000 allowance. Not all ISA providers offer this flexibility though, so check with yours before withdrawing any money.

Myth four – You must decide which funds or investments you want to hold in an Investment ISA before you can open one

If you want to invest this year’s allowance in an investment ISA, but haven’t yet decided where to put your money, you pay it into the ISA but keep it as cash until you’ve made up your mind. The ability to hold cash in your Investment ISA can also be useful if you’re uncertain of market conditions and don’t want to invest immediately.

Myth five – Once you’ve chosen an ISA, you’re stuck with it

ISAs have become more flexible in recent years - it’s possible to change ISA provider and switch from cash to investments and vice versa.

You just need to make sure that the ISA you want to move to accept transfers, and check you won’t be charged a penalty, suffer any other detriment or lose any benefits from your current ISA provider if you move.

If you’re looking to transfer money you put into your ISA in a previous tax year, you don’t have to move it all. So for example, if you have £40,000 in a cash ISA and want to start investing, you could transfer some of it to an investment ISA and leave the rest in your cash ISA.

However, if it’s money you’ve paid into your ISA during the current tax year, you’ll have to transfer the full amount.

If you’re thinking of transferring money from a cash ISA and investing it, make sure you’re comfortable with the additional risks associated with investing. The value of investments can fall, although investing offers the potential of generating higher returns over the longer term.

Please bear in mind that this article is for general information purposes only. If you’re unsure, seek professional financial advice.

You may also be interested in

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change in future. Their effects on you will depend on your individual circumstances.

Investment ISA

An easy way to start investing

Also known as a stocks and shares ISA, an Investment ISA is a tax-efficient1, simple way to invest for your future. Invest up to £20,000 per year and the returns you make from your investments are tax-free.

Investment Account

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Keeping up to speed with the issues that could affect your investments is important for all smart investors. Read our latest articles to discover topical economic and market insight, investment ideas, and some of the trends which are shaping the world today.

Important information

If you invest outside an ISA, you have several tax-free allowances, including the CGT annual allowance, personal savings allowance and dividend allowance. Find out more about your tax allowances. Bear in mind that tax rules might change in the future, and their effect on you depend on your individual circumstances.

Barclays Investment Solutions Limited provides wealth and investment products and services (including the Smart Investor investment services) and is authorised and regulated by the Financial Conduct Authority and is a member of the London Stock Exchange and NEX. Registered in England. Registered No. 2752982. Registered Office: 1 Churchill Place, London E14 5HP.